On September 19, 1931, the UK left the gold exchange standard. There is a wonderful little video below of Keynes taking about that event.
Ludwig von Mises, one of the leading Austrian economists of that era, made a prediction about what would happen, and this story is told by Mark Skousen:
“In September 1931, Ursula Hicks (wife of John Hicks) was attending Mises’ seminar in Vienna when England suddenly announced it was going off the gold exchange standard. Mises predicted the British pound would be worthless within a week, which never happened. Thereafter, Mises always expressed deep skepticism about the ability of economists to forecast.” (Skousen 2009: 286, n. 2).I am not surprised that Skousen relegates this embarrassing story to a footnote. So much for Mises’s great predictive powers.
Keynes, by contrast, was correct in predicting that British trade would benefit from abandoning the gold exchange standard and from the currency depreciation that resulted. He was also correct in opposing the gold standard fanatics like Mises who predicted the collapse of the value of the pound. In our era, the Austrians have been predicting hyperinflation, but they are as contemptibly and stupidly wrong as Mises was in 1931.
BIBLIOGRAPHY
Skousen, M. 2009. The Making of Modern Economics: The Lives and Ideas of the Great Thinkers (2nd edn.), M.E. Sharpe, Armonk, N.Y.
Awesome. Keynes speaking!
ReplyDeleteWhat do you feel would have happened if British government returned to an exchange rate that was much lower and more realistic, rather than the one they chose out of pride?
Another separate issue:
I don't understand economists becoming a substitute voice for businessmen, manufacturers, and workers, as if they know exactly what they think or want. Why, because they can read minds?
If you went to an average person on the street, and asked, "Do you favour a strong or a weak currency?", what would that person answer?
And if you then asked him, "Do you favour forcing down prices of domestic goods in foreign currency to make them more competitive in foreign markets?", what do you think he would answer?
Obviously, the answers will reveal a contradictory nature among some people. To act like British manufacturers, businessmen, and workers have a complete and full understanding of what's going on, and have already made up their minds on precisely what legislation they would want for currency is silly.
And brilliant economists are susceptible to such silliness. The only other class of people who act like they can read minds are TV talking heads and tabloid columnists.
"What do you feel would have happened if British government returned to an exchange rate that was much lower and more realistic, rather than the one they chose out of pride?"
ReplyDeleteThen the UK would have avoided the most severe involuntary unemployment problems it had in the 1920s.
However, I doubt whether it would not have completely avoided the problem of involuntary unemployment, as the gold exchange standard imposed significant constraints on government's ability to eliminate unemployment.
Have governments not worked around those constraints? Anti-unemployment programs do go back to the 19th century?
ReplyDelete"If you went to an average person on the street, and asked, "Do you favour a strong or a weak currency?", what would that person answer?"
ReplyDeleteYour comments here and later appear to be tongue-in-cheek.
You might as well ask the “average person on the street” if he/she has the necessary knowledge to answer the question: do you think M theory, with its postulated 11 dimensions and its modelling of the extra dimensions of spacetime as 6-dimensional Calabi–Yau manifolds will unify Einstein’s general and special theories of relativity with quantum mechanics??
The “average person on the street” doesn’t have the knowledge to answer that question, just as they probably don’t have the necessary knowledge to know if they “favour a strong or a weak currency.”
So what? Serious economists do.
"Have governments not worked around those constraints? Anti-unemployment programs do go back to the 19th century? "
ReplyDeleteI know of NO governments in the 19th century that attempted to eliminate involuntary unemployment. If you know of any, do tell.
I merely made those remarks, because Keynes in the video said that many British "businessmen, manufacturers, and unemployed" would no longer have to be confined in the "Golden Cage".
ReplyDeleteIt's a rough variation of what some other contemporaru economists such as Brad deLong have said - that no matter what economists believe, popular opposition from unemployed workers to gold standard would have ended it.
Where were the laymen who were demanding monetary reforms? Where were the businessmen and manufacturers petitioning for end to hard currency? Where were unemployed workers banding up to say, "End the gold standard"?
PS: I am really sorry I do not have better proof of anti-unemployment programs of those days, but I merely remember Bastiat having written, "There is an article in the Constitution which states: "Society assists and encourages the development of labor.... through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands..." As a temporary measure in a time of crisis, during a severe winter, this intervention on the part of the taxpayer could have good effects... as insurance. It adds nothing to the number of jobs nor to total wages, but it takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times..."
It seemed that France in those days had stimulative public programs to reduce unemployment. That is all. Sorry again.
Many "British businessmen, manufacturers, and unemployed" knew well that something was severely wrong with British economic policy in the 1920s.
ReplyDeleteA considerable number of businessmen and manufacturers knew it was the faulty gold exchange standard policy that was to blame, and this was largely Churchill's fault.
Since Churchill is a bête noire of the Austrians and his imposition upon Britain of a “gold standard” after World War I at an exchange rate that was far too high was a statist act, you can’t very well blame Rothbardians or "the free market" for that, can you?
ReplyDeletehttp://www.lewrockwell.com/raico/churchill-full.html
I am not "blaming" Rothbardians for the imposition on Britain of a “gold exchange standard” at too high a rate. This a straw man.
ReplyDeleteYour problem is that you are frequently incapable of properly engaging with what is written here.
My points:
(1) Mises' prediction was worthless.
n. 2).
(2) Keynes, by contrast, was correct in his predictions.
(3) Some modern Austrians have been as disastrously wrong in their predictions of hyperinflation as Mises.
A further point emerges too:
Mises was doubtful about economists' ability to make predictions: that humility is lacking from a good many modern Austrians today.
A Gold exchange standard is not the same as a free market in money. It is just another Statist intervention in the system of money. The failure of the gold exchange standard is a failure of intervention and not of Gold.
ReplyDeleteJust making a point, that's all.
"Keynes, by contrast, was correct in predicting that British trade would benefit from abandoning the gold exchange standard and from the currency depreciation that resulted."
ReplyDeleteWhy Keynes? Anyone with half a brain could have made that prediction. The key point is the long-term consequences of such actions, but then we are all dead in the long term, aren't we?
ROFLMFAO
"A Gold exchange standard is not the same as a free market in money. It is just another Statist intervention in the system of money. The failure of the gold exchange standard is a failure of intervention and not of Gold."
ReplyDeleteAnd I never claimed that the "gold exchange standard" was a pure "free market in money." That is irrelevant to the purpose of the post above: the inability of Mises to predict something accurately.
Keynes, on the other hand, got it right.
"Anyone with half a brain could have made that prediction."
ReplyDeleteLOL.. Then perhaps Mises had half a brain. If he had a full brain he might have made correct predictions, as Keyens did.
"Keynes, on the other hand, got it right"
ReplyDeleteYeah!! Even a broken clock gets the time right twice a day. The point which you are missing is that Keynes was a broken clock when it comes to economics.
Incidentally, did he predict the stagflation of the 70's?
"LOL.. Then perhaps Mises had half a brain."
ReplyDeleteNo. It's the other way. Keynes had half a brain and hence made the prediction. Mises had a full one and knew that the long-term adverse consequences of a move this hare-brained obviously exceed the short-run benefits to trade.
I know this is something too much for whatever-Keynesians to digest. You just can't think beyond a few seconds, can you?
"Incidentally, did he predict the stagflation of the 70's? "
ReplyDeleteHis theory can, yes!
Keynes's General Theory is, without any doubt at all, capable of showing that you can in fact get rising unemployment with rising inflation.
The neoclassical synthesis, which was the Hickian IS-LM bastardized version of Keynes' work, did in fact have theoretical problems explaining stagflation. But this just shows you don't the have foggiest idea about Keynesian theory and its different forms.
Stagflation was never a problem for Post Keynesians.
Geoff Harcourt explains it here from 20.00 minutes onwards:
http://www.youtube.com/watch?v=DpSNiWBfabE
Nicholas Kaldor in “Inflation and Recession in the World Economy” (Economic Journal 86 (December, 1976): 703–714) explained stagflation and the solutions to it.
Of course, when you get negative supply shocks that will feed into prices of factor inputs, and you can get wage-price spirals.
The solution is commodity buffer stocks to break the source of the problem by maintaining stable commodity prices. This is exactly why the 1940s, 1950s, 1960s had stable commodity prices: the US maintained buffer stocks, then dismantled in the mid-1960s.
"His theory can, yes!"
ReplyDeleteROFLMAO..... You didn't get my question. I didn't ask "Can he?". I asked "Did he?"
"You didn't get my question. I didn't ask "Can he?". I asked "Did he?" "
ReplyDeleteAsking whether Keynes himself "predicted" 1970s stagflation (which occured long after he was dead) is as stupid as asking: Did Mises predict a 2008 financial crisis??? Well, did he?
He didn't!! Therefore his theories must be wrong!
= sheer idiocy, just like your comment.
As I said, the General Theory has models that show exactly how staflation can happen.
"That is irrelevant to the purpose of the post above: the inability of Mises to predict something accurately."
ReplyDeleteThat may be so, but it is relevant to the point of my post which is to say that fools rush in where angels fear to tread. Those who have half a brain rush in to make predictions while those with a full one hold their horses and say "Hey!! Economics does not give you enough knowledge to make predictions except long-run effects. Even there, it can't get the timing right".
"He didn't!! Therefore his theories must be wrong!"
ReplyDeleteActually, you were doing that. I was just pointing it out. That you yourself said this
"= sheer idiocy, just like your comment."
next shows that either your post had no point or that you are a absolute idiot.
And Joan Robinson, along with her colleagues, had elaborated such models of stagflation by 1962.
ReplyDelete"Actually, you were doing that."
ReplyDeleteI was doing no such thing above. I do NOT claim that Misesian praxeology or all of Austrian eocnomics is wrong, merely because Mises made a wrong prediction:
Again, I said:
(1) Mises's prediction was worthless.
(2) Keynes, by contrast, was correct in his predictions.
(3) Some modern Austrians have been as disastrously wrong in their predictions of hyperinflation as Mises.
Nothing MORE, nothing LESS. All propositions are true.
Robert,
ReplyDeleteThanks for your comment.
By the way, do you think Garrison's ABCT is as dependent as Hayek's was on the Wicksellian natural rate and monetary equilibrium analysis?
Basically, when you read his
Time and Money: The Macroeconomics of Capital Structure (London and New York, 2000), the word “Sraffa” does not (as far as I can see) even appear. It’s as if the Hayek–Sraffa exchange never occurred.
"Nothing MORE, nothing LESS. All propositions are true."
ReplyDeleteMay be so, but then my point was simply that a person's competence as an economist is not to be judged by the quality of the predictions they made. Making good predictions does not make a person a better economist. Neither does not making good predictions make a person a poor economist.
Essentially, your post comes across as completely pointless jabber.
"the word “Sraffa” does not (as far as I can see) even appear"
ReplyDeleteLemme guess..... Maybe because Sraffa was just talking nonsense without understanding the point of the ERE? That talking of a barter economy is not the same as the ERE at equilibrium?
"May be so, but then my point was simply that a person's competence as an economist is not to be judged by the quality of the predictions they made."
ReplyDeleteExtraordinary rubbish. The predictive power of an economist is based on his/her underlying theories, and, if the theories have no or little predictive power in the real world, that is good evidence that the theories are flawed.
The absurdity of praxeology comes out here: a theory that spurns empirical evidence and claims it can never be verified or falsified by empirical evidence. Yet "pop" and vulgar Austrians like you are forever claiming thet ABCT "predicts" real world cycles, and acting like your theories are verified.
In fact, even if you could show ABCT predicted the 2000s cycle, that, according to Mises, won't even verifiy its truth.
It is no wonder that Hayek would have none of this idiocy and went over to Popper's falsificationism by hypothetico-deduction as the empirical method for economics.
The ERE is irrelevant to Hayek's version of ABCT.
ReplyDeleteYou are persistantly and stupidly incapable of distinguishing different statments of ABCT in different books.
Hayek believes in real world monetary equilibrium processes and the need for neutral money in the real world by a natural rate that can obtain in the real world.
There are no such real world equilibrating mechanisms (owing to uncertainty and subjective expectations) and no single natural rate in the real world.
"The predictive power of an economist is based on his/her underlying theories, and, if the theories have no or little predictive power in the real world, that is good evidence that the theories are flawed."
ReplyDeleteThis is downright hilarious. People are predictable, aren't they? And since you can predict what people will do, you can predict what outcomes will result on account of people's actions, can't you?
WOW!!! You are a perfect symbol of the fundamental stupidity of whatever-Keynesians.
"There are no such real world equilibrating mechanisms"
ReplyDeleteYeah!! There is no such thing as arbitrage. WOW!! Brilliance personified.....
"The ERE is irrelevant to Hayek's version of ABCT."
ReplyDeleteSp says you who does not even understand what the ERE is. You are as stupid as Robert who calls it a "stationary state".
"You are persistantly and stupidly incapable of distinguishing different statments of ABCT in different books."
ReplyDeleteAnd you are persistently stupid to fail to recognise that ABCT has been evolving ever since Mises formulated it in 1912.
"Sp says you who does not even understand what the ERE is. You are as stupid as Robert who calls it a "stationary state".
ReplyDeleteThe ERE is irrelevant to Hayek's version of ABCT. You haven't refuted that statement.
Furthermore, the "stationary state" IS a way of referring to the ERE:
“… this line of argument makes it necessary to clarify the precise meaning of general equilibrium, as well as its role in economic analysis. Mises argued that general equilibrium—which he called the stationary economy (stationäre Wirtschaft)26—is a purely methodological device. It is an imaginary construct (Gedankenbild) that has no counterpart in the real world. Its only purpose is for the definition of profit and loss.” (Hülsmann 2007: 773).
26 In Human Action, he called it the "even rotating economy," pp. 246-67.
Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.
Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.
Note that footnote: In Human Action, he called it the "even rotating economy."
"And you are persistently stupid to fail to recognise that ABCT has been evolving ever since Mises formulated it in 1912."
ReplyDeleteLOL.. that is precisely what I have said above and elsewhere.
"The ERE is irrelevant to Hayek's version of ABCT."
ReplyDeletePlease explain how ERE is irrelevant to the concept of natural rate of interest. I am all ears!!!
"LOL.. that is precisely what I have said above and elsewhere."
ReplyDeleteWhile failing to understand the basis of the theory. Good work.
Incidentally, something struck me when I was going through Robert's 'work'. How do you depress interest rates without meddling in the present-future goods market through credit expansion and monetary inflation? In other words, how do you think it makes sense to study the effect of interest rates alone completely ignoring the other side of the coin - credit expansion and monetary inflation?
And what about the bit in Prices and Production where Hayek explains how it is the injection of capital into the structure of production that causes lengthening of the production structure and not interest rate itself? And the bit where he explains that it is the injection of capital via credit expansion that makes the lengthening of the production structure unstable by causing inter-temporal discoordination?
Basically, given that Robert has not dealt with any of these, why should anyone give his work any respect at all? Just wondering.
"While failing to understand the basis of the theory."
ReplyDeleteIn other words, you conceded that the ERE is irrelevant to Hayek's version of ABCT. And you HAVEN'T refuted that statement.
"Please explain how ERE is irrelevant to the concept of natural rate of interest.
The natural rate of interest as used by Hayek is a Wicksellian concept.
And ERE is not used by Wicksell or Hayek.
ReplyDelete"And ERE is not used by Wicksell or Hayek"
ReplyDeleteSo what, genius? When Wicksell defines natural interest rates in the context of an economy based on division of labour and specialisation and uses the concept 'in natura', the unstated assumption (though it was not clarified what exactly that meant till Mises wrote HA) was clearly that it is in the ERE at equilibrium. Only in the ERE at equilibrium can you have such an economy.
While Hayek did not state this explicitly, it is clearly implicit.That it was made explicit by Mises in HA which was published later does not mean that it was not implicit. And you forget that Hayek was expanding on the business cycle theory formulated by Mises. That Mises made this point explicit in HA while being consistent with the Business Cycle Theory he proposed in 1912 tells me that it was implicit in his theory.
That is the essence of an evolving theory, my dear genius.
p.s.: Personally, it is probably the fact that I read TTMC before I read Prices and Production helped me see the evolution of the theory.
"So what, genius? "
ReplyDeleteAt last, after all that nonsense.
Here's a little bit from Murphy on your master of fallacies.
ReplyDelete"At last, after all that nonsense."
ReplyDeleteThe meaning of the 'So what, genius?" was simply that that point does not make Sraffa's criticism of Hayek's explanation of ABCT valid. It was still an incorrect criticism based on a failure to understand the concept he was criticising (just as it is for you).
"Here's a little bit from Murphy on your master of fallacies."
ReplyDelete???
What on earth does this mean?
Bala meant to link to this, or maybe this, but probably not this. Murphy also has a couple of journal papers on Samuelson on capital theory.
ReplyDeleteOops.... Forgot to post the link :)
ReplyDeletehttp://mises.org/daily/1486
Your link:
ReplyDeleteSraffa's Production of Fallacies by Means of Fallacies
Mises Daily: Wednesday, April 07, 2004 by Robert P. Murphy
This is nothing but a review of Sraffa's book Production of Commodities by Means of Commodities: Prelude to a Critique of Economic and his neo-Ricardianism. There is no word about the Hayek-Sraffa or even the natural rate of interest.
Robert responds to Murphy on reswitching here:
ReplyDeletehttp://robertvienneau.blogspot.com/2008/05/robert-murphy-on-sraffa-in-error.html
LK, I had a much more fundamental and basic question in mind.
ReplyDeleteIn the past, you have indicated your agreement with the idea that monetary policy is an insufficient and limited tool for countercyclical adjustment.
At the same time, you feel that some hard money policies put serious constraints on use of fiscal policy to fight recessions.
What do you find to be the "lesser evil" between fiscal policy to fight recessions under the gold standard and fully empowered monetary policy under forced balanced budget requirements?
"What do you find to be the "lesser evil" between fiscal policy to fight recessions under the gold standard and fully empowered monetary policy under forced balanced budget requirements?
ReplyDeleteIn case of (2), are you thinking of a fiat money system with a perpetual goverment budget balance? No deficit ever? That would lead to disaster.
As for the gold standard, it is not much better, with its deflationary tendencies whenever you run a trade deficit or when there is insufficient base gold to meet rising demand for credit, even if fiduciary media are used in a fractional reserve banking system.
In the 19th century, there was a period of sustained deflation that lasted from 1873 to 1896. Contemporaries weren't all singing the praises of the gold standard: there was a lot of pessimism amongst businesses, confidence shattered, and people complaining about debt deflation.
This is exactly why the 1940s, 1950s, 1960s had stable commodity prices: the US maintained buffer stocks, then dismantled in the mid-1960s. Interesting. Would you have a reference for that?
ReplyDeleteAbba Lerner foresaw stagflation in the early 50s with his differentiation between low full employment and high full employment. Most of his work afterward concerns inflation.
ReplyDeleteNicholas Kaldor in “Inflation and Recession in the World Economy” (Economic Journal 86 (December, 1976): 703–714.
ReplyDeleteDale E. Hathaway, Hendrik S. Houthakker, John A. Schnittker, "Food Prices and Inflation,"
Brookings Papers on Economic Activity, Vol. 1974, No. 1 (1974), pp. 63-116.
In particular, see Kaldor:
ReplyDelete"For reasons given earlier the duration and stability of the postwar economic boom owed a great deal to the policies of the United States and other governments in absorbing and carryirig stocks of grain and other basic commodities both for price stabilisation and for strategic purposes. Many people are also convinced that if the United States had shown greater readiness to carry stocks of grain (instead of trying by all means throughout the 1960s to eliminate its huge surpluses by giving away wheat under PL 480 provisions and by reducing output through acreage restriction) the sharp rise of food prices following upon the large grain purchases by the U.S.S.R., which unhinged the stability of the world price level far more than anything else, could have been avoided.
Nicholas Kaldor in “Inflation and Recession in the World Economy,” Economic Journal 86 (December, 1976): p. 228.
For the US, it was impossible to comply with a commemorative conference on the exchange of the dollar to gold, as the price of gold had to be supported by its own reserves. By 1971 the United States from the conversion of dollars into gold at the official rate. There was a need to reform the current monetary system.
ReplyDelete